To equip you with an understanding of good governance practices in the public sector

Outline

Setting the scene

Introduction to corporate governance

Constitution and operation of the Board and its committees

Performance evaluation and remuneration

Risk management and internal controls

Internal audit

Accounting and auditing

Sustainability

Ethics and organisational integrity

Disclosure practices

Getting it right

Conclusion

3Setting the scene

Common threats in recent common failures

New or dynamic corporate cultures

Industries presenting extraordinary growth opportunities

Complex industries

Tone at the top

Weak or non existent controls

Individual pressure to perform (PMS)

Little or no emphasis on ethical behaviour

Huge losses

Frauds

Failure to understand risks faced

What did shareholders/stakeholders see?

Greed

Override of controls

Dysfuntional reward systems

Accounting lost its concept

Failures after receiving assurances

Risk management processes not effective

What do stakeholders/shareholders want to see

Trust

Corporate culture

Ethics ( values and intergrity )

Effective accounting models

Controls

Effective assurance funtions and ERM frameworks

4The importance of stakeholders

Stakeholders either impact, or are impacted by, an organisation. As such, they have a vested interest in it and a major influence on its ability to achieve strategic objectives.

funders

beneficiaries

employees/volunteers

partners

society at large

There is therefore value in managing your relationship - and so your reputation - with stakeholders, both individually and collectively, on an integrated basis.

5Why does governance matter?

The capital markets say it does

If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. Arthur Levitt Ex-Chairman, SEC

Society says it does

The proper governance of companies will become as crucial to the world economy as the proper governing of countries. James Wolfensohn President of the World Bank 6Definition of governance

Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals . the aim is to align as nearly as possible the interests of individuals, corporations, and society.

Sir Adrian Cadbury

Corporate governance is about successfully managing the three Rs risk, return and reputation it is long hand for good, commonsense commercial management.

Nobby Clarke

Former Chairman, Fosters

Essentially, corporate governance is the means of ensuring due and adequate control over the strategy and direction of an organisation and the stewardship, use and disposition of its assets - both financial and non-financial - in achieving its key objectives. 7King II - The context

Local

New RSA constitution

Legislation on public interest issues

Employment equity

Access to information

Skills development

The environment

Focus on corporate citizenship

Corporate scandals/failures

Fraud and corruption

Financial related Acts ( Companies Bill, PFMA, MFMA, PPPFA, T.R etc )

Preference for self-regulation

King II/Batho Pele

Departmental policies

8King II - Key themes

Primary characteristics

Discipline

Transparency

Independence

Accountability

Responsibility

Fairness

Social responsibility

Good governance starts in the boardroom and ends in the boardroom

Balance between performance and conformance

Forward-looking - proactive governance approach

Stakeholder-inclusive approach

Importance of meaningful corporate disclosure

Stakeholders to determine what represents good governance practice

It is the submission of the King Committee that it would be in the enlightened self-interest of every enterprise to take careful cognisance of the recommendations outlined in this Report and to adhere to these to the extent practicable and applicable. King Report 2002 9The role of the Board

The board should be able to exercise objective judgment on the corporate affairs of the business enterprise, independent from management but with sufficient management information to enable a proper and objective assessment to be made by the directors collectively. The board should guide and set the pace of the companys current operations and future developments.

King Report 2002

Does the Board comprise a sufficient number of individuals with the appropriate mix of credibility, skills, experience and demographic diversity to lead and direct the organisation and to retain full and effective control over it in the pursuit of its objectives?

Is the Board satisfied that it has taken all appropriate steps, including the appointment of focused committees, to ensure that it discharges its responsibilities for good governance in the organisation?

11A. The Board

The board is the focal point of the corporate governance system. It is ultimately accountable and responsible for the performance and affairs of the company. Delegating authority to board committees or management does not in any way mitigate or dissipate the discharge by the board and its directors of their duties and responsibilities.

King Code 2002

Appropriate skills/demographics gender, race etc.

Balance of executive and non-executive directors

majority of non-executives

sufficient independent directors Unitary board favoured

Executive management committee

Separation of Chairperson/CEO roles

Staggered rotation periodic change

Succession planning CEO/AO

Board charter

Code on conflict of interests

12A. The Board

Formal orientation/ongoing briefing

Background check on new directors

Use of a Nomination Committee

Formal adverts on newspapers

13B. Operation of the Board

Accountability and responsibility of the Board

Code of Conduct/Ethical decision-making (See next slide)

Definition of materiality ( materiality framework )

Regular meetings

Delegation of Authority

Unrestricted access of non-executives

Key performance indicators

Going concern viability of the business

Attention to substance vs. form

Company secretarys guidance

14B. Operation of the Board - A framework for ethical decision- making

Recognise the event/decision/issue

Think before you act

Decide on a course of action

Test your decision

Proceed with confidence

Is it legal?

Does it feel right?

Will it reflect negatively on you or your organisation?

Who else could be impacted by this?

Would you be embarrassed if others knew you took this course of action?

Is there an alternative action that does not pose an ethical conflict?

Is it against your organisations professional standards?

What would a reasonable person think?

How would it look in the newspapers?

Can you sleep easily at night?

"If it is not right do not do it, if it is not true do not say it." Marcus Aurelius Emperor of Rome 161-180 AD 15B. Operation of the Board - Board Meetings (1)

The board should meet regularly, at least once a quarter if not more frequently as circumstances require, and should disclose in the annual report the number of board and committee meetings held in the year and the details of attendance if each director (as applicable).

King Code 2002

Written notice of meetings

Clear, manageable agenda, e.g.

progress to strategic and business plans

financial and operational performance

risk issues

major human resources issues

report of committees

Timely distribution of documentation

Advance briefings on issues under review

16B. Operation of the Board - Board Meetings (2)

The board should meet regularly, at least once a quarter if not more frequently as circumstances require, and should disclose in the annual report the number of board and committee meetings held in the year and the details of attendance if each director (as applicable).

King Code 2002

Consistent attendance (or removal)

Quorum

Disclosure of conflicts of interest

Open and constructive debate

Minutes and resolutions

Meetings records

signed attendance register

record of resolutions

keeping and approval of minutes

right of access to minutes

17C. Board committees

Board committees are an aid to assist the board and its directors in discharging their duties and responsibilities, and boards cannot shield behind these committees.

King Code 2002

Required committees Audit and Remuneration

Optional committees Nomination, Risk, Health and Safety, Finance

Independent non-executive Chairpersons

Regular evaluation

Documented terms of reference

Transparency/disclosure on activities in annual report

Transparent appointment process

Primarily non-executive directors

Regular feedback to Board/Executing Authority

Access to independent professional advice

18D. Audit Committee

Comprised of a majority of non-executive directors

Financial literacy of members

Chairman/CEO/AO may be invitees

Election and independence of chairperson

Considerations

Internal control systems

Internal audit function

Risk areas for audit coverage

Financial information relevance and reliability

Accounting and auditing issues identified

The appointment of an audit committee gives the board a means to monitor an effective internal control system. In addition, the audit committee reinforces both the internal control system and the internal audit function.

King Report 2002

19D. Audit Committee

Compliance with laws and regulations

Results and cost effectiveness of external audit

Appointment and determination of fees of external audit

Decision as to audit of interim results

Principles for provision of non-audit services by external auditors

20E. Remuneration Committee

Comprised of a majority of non-executive directors

Chairperson to be non-executive

Consider the adequacy of disclosure and composition of directors remuneration in the AFS.

21F. Risk Management

The board is responsible for the total process of risk management, as well as for forming its own opinion on the effectiveness of the process. Management is accountable to the board for designing, implementing and monitoring the process of risk management and integrating it into the day-to-day activities of the company.

King Code 2002

Does the organisation have an effective system for the identification, evaluation, monitoring and measurement of all risks impacting its ability to achieve its objectives?

Does the organisation comply with all legal and regulatory requirements to which it is subject?

22F. Risk Management

The board is responsible for the total process of risk management, as well as for forming its own opinion on the effectiveness of the process. Management is accountable to the board for designing, implementing and monitoring the process of risk management and integrating it into the day-to-day activities of the company.

King Code 2002

Board to set risk strategy and policy

Board to establish appetite for risk

Confidential reporting process whistle-blowing for fraud and similar risks

Internal audit is an independent, objective assurance and consulting activity to add value and improve a companys operations. It should assist the directors and management to maintain effective controls by evaluating those controls to determine their efficiency and effectiveness, and by developing recommendations for enhancement or improvement.

King Code 2002

Does the organisation have an effective internal audit function?

Internal Audit Charter

Definition of function within the organisation consistent with that of IIA.

Reporting to CEO/AO

Ready and regular access to

Chairperson of Board

Chairperson of Audit Committee

Report at each Audit Committee

Audit Committee role in hiring and dismissal of Head of Internal Audit

Independence and objectivity

Is assurance and value offered?

26G. Internal Audit

Internal audit is an independent, objective assurance and consulting activity to add value and improve a companys operations. It should assist the directors and management to maintain effective controls by evaluating those controls to determine their efficiency and effectiveness, and by developing recommendations for enhancement or improvement.

King Code 2002

Vetting of information supplied to the Board

Risk-based internal audit planning

Co-ordination with external audit and other assurance functions

Respect and co-operation of Board and management

Educate audit committee and board

Participate in audit committees

Audit corporate governance processes

Assess management s ERM compliance efforts

Assist in self assessments (management, board and its committees)

27H. Integrated Sustainability Reporting

In a corporate context, sustainability means that each enterprise must balance the need for long-term viability and prosperity - of the enterprise itself and the societies and environment upon which it relies for its ability to generate economic value - with the requirement for short-term competitiveness and financial gain.

Level 3 Investigation and demonstration of changes and benefits resulting from the adoption of practices

28H. Integrated Sustainability Reporting

Has the organisation adopted social and environmental management practices that allow it to measure its impact on the communities within which it operates, by means of established performance indicators?

Social, transformation, ethical, environmental policy and practices

Distinction, in terms of stewardship

accountability to members

responsibility to stakeholders

29H. Integrated Sustainability Reporting

In a corporate context, sustainability means that each enterprise must balance the need for long-term viability and prosperity - of the enterprise itself and the societies and environment upon which it relies for its ability to generate economic value - with the requirement for short-term competitiveness and financial gain.

King Report 2002

Non-financial value drivers

Specific Southern African priorities

HIV/AIDS

Black economic empowerment

Procurement practices

Employment equity

Gender issues

Human capital

30H. Integrated Sustainability Reporting - Ethics

What is out in the open may not always be ethical.

What is concealed is almost certain not to be.

Sir Adrian Cadbury

Ethics is what we do when no-one else is looking.

Anon

You cant make people good by Act of Parliament.

Oscar Wilde

Has the organisation adopted and communicated to internal and external stakeholders clear guidelines and standards for organisational integrity, against which organisational and individual activities are measured?

31H. Integrated Sustainability Reporting Ethics

What is out in the open may not always be ethical.

What is concealed is almost certain not to be.

Sir Adrian Cadbury

Ethics is what we do when no-one else is looking.

Anon

You cant make people good by Act of Parliament.

Oscar Wilde

Stakeholder involvement in determining standards of behaviour

Codification of standards

Ethics programme

systems and procedures

executive oversight

recruitment/promotion process

delegation of authority

communication and training

whistleblowing channels

consistency in discipline

response to offences

Public disclosure of adherence

Review of relationship with those not espousing standards

32King II - The Chairperson

The chairpersons primary function is to preside over meetings of directors and to ensure the smooth functioning of the board in the interests of good governance.

King Report 2002

Firm and objective leadership

Preferably independent non-executive

Direction to the Board

Primary liaison with executive

Advice and guidance to directors

Preside over meetings

Smooth functioning of the Board

Ensure directors are informed

33King II - Company Secretary

The company secretary, through the board, has a pivotal role to play in the corporate governance of a company.

Companies should establish a formal and transparent procedure for developing a policy on executive and director remuneration which should be supported by a Statement of Remuneration Philosophy in the annual report.

King Code 2002

Does the Board operate transparent processes of performance measurement, evaluation and related reward for directors and members of executive management?

36King II - Performance evaluation and remuneration

Companies should establish a formal and transparent procedure for developing a policy on executive and director remuneration which should be supported by a Statement of Remuneration Philosophy in the annual report.

The external audit provides an independent and objective check on the way in which the financial statements have been prepared and presented by the directors when exercising their stewardship to the stakeholders. An annual audit is an essential part of the checks and balances required, and is one of the cornerstones of corporate governance.

King Report 2002

Is the Board satisfied that the external auditor enjoys unimpaired independence and objectivity in the execution of the external audit mandate?

38King II - Accounting and auditing

The external audit provides an independent and objective check on the way in which the financial statements have been prepared and presented by the directors when exercising their stewardship to the stakeholders. An annual audit is an essential part of the checks and balances required, and is one of the cornerstones of corporate governance.

King Report 2002

Audit Committee

Unimpaired independence of external auditor

Consultation/liaison between external and internal auditor

Principles for recommending use of external auditor for non-audit services

Record of facts/assumptions underlying going concern assessment

Separate disclosure of fees paid to external auditors

audit services

non-audit services (including detailed description)

39King II - Disclosure practices

The quality of the information must be based on the guidelines of openness and substance over form. Reporting should address material matters of significant interest and concern to all stakeholders Reports should present a comprehensive and objective assessment of the activities of the company providing a full, fair and honest account of its performance.

King Code 2002

Does the organisation make regular and full disclosure in meaningful, understandable and balanced terms on all financial and non-financial issues of relevance and interest to shareowners and other stakeholders?

40Conclusion - getting it right

Plan to be successful

Prepare a core team

Obtain executive sponsorship

Develop an implementation plan

Use a systematic approach to achieve intergration

Conduct a current state of assessment

Understand current capabilities

Identify opportunities to improve

Monitor

Focus on the value that corporate governance will deliver to the organisation

Draw on key enablers to facilitate successful implementation

Realise the benefits of effective corporate governance

Link growth, risk and returns

Rationalise resources

Exploit opportunities

Reduce operational suprises and losses

Report with greater confidence

Satisfy legal and regulatory requirements

Greater management comfort in decision making

Know the risks you take and be able to control your risks

Creating trust and credibility

Focus on real issues

41A final thought ...

With governance, as with anything else, you reap what you sow

Many who plan to seek God at the eleventh hour die at 1030.

Sign above entrance to border control post

Kasungula, Zambia

42pwc

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